With new foreign remittance rules coming into force from July 1, any foreign remittances under the liberalised remittance scheme (LRS) would now attract a TCS (tax collection at source) of 20 percent instead of 5 percent earlier.
The higher tax rate would apply for travel, investment and remittances barring education expenses. In an interview with MintGenie, Sudhir Nayak, Partner at Dhruva Advisors LLP, shares details on the latest provisions relating to foreign remittances.
Recently, the government brought international credit card spending also under the ambit of LRS.
Later, a clarification allayed the fears of tax payers that said credit card spending up to ₹7 lakh would not attract 20 percent TCS.
Q. Can you share your thoughts on the latest notification regarding 20 percent TCS on expenditure incurred via international credit cards? How is it different from the rule that existed before?
The Tax Collection at Source (TCS) provisions were extended for remittance under Liberalized Remittance Scheme (LRS) effective from 1 October 2020 and the TCS rate was 5% on remittances above ₹7,00,000.
The TCS rate has now increased to 20 percent effective from July 1, 2023, on all remittances. However, the TCS rate has remained at 5 percent for remittance for the purpose of education or medical treatment.
LRS is a scheme under the Foreign Exchange Management Act, 1999 whereby resident individuals (including minors) are permitted to remit up to USD 2,50,000 per financial year for permitted current and/or capital account transactions.
The Foreign Exchange Management (Current Account) rules, 2000 provided a list of current account transactions (in Schedule III to the rules) permitting remittances to an individual within the limit of $250,000.
Until 16 May 2023, payment done by an individual using International Credit Card (ICC) while outside India was outside the LRS limit of USD 2,50,000. However, payments from India using ICC or debit card were included in the LRS limit.
On May 16, 2023, the Ministry of Finance issued a notification and covered the ICC usage, while outside India, within the LRS limit of USD 2,50,000. By this move, the payments using ICC were brought within the framework of LRS and resulted in applicability of TCS provisions.
Q. How will the rule of 20% TCS on foreign remittances be different when the sum is incurred for educational & medical expenses?
As mentioned above, TCS rate on remittance under LRS is increased from 5 to 20 percent w.e.f. July 1, 2023 without any threshold limit.
However, the threshold of ₹7,00,000 and the old rate of 5 percent will continue to apply to remittance for the purpose of education or medical treatment.
The FAQ dated May 17 issued by the Ministry of Finance clarified that the TCS rate of 5% will also apply on travel and incidental expensesrelated to education and medical treatment. Detailed clarification will be issued by the government.
Q. How will the ₹7 lakh threshold apply in foreign remittances sent for non-education and non-medical expenses?
The limit of ₹7,00,000 for non-education and non-medical expenses is available till 30 June 2023. Come July 1, 2023, the remittance for non-education and non-medical expenses would be subject to TCS at the rate of 20 percent. It is pertinent to note that in a press release dated 19 May 2023 issued by Ministry of Finance it is stated that:
“To avoid any procedural ambiguity, it has been decided that any payments by an individual using their international Debit or Credit cards upto ₹7 lakh per financial year will be excluded from the LRS limits and hence, will not attract any TCS.”
From the reading it appears that if the payment is for non-medical and non-education transaction using ICC or debit card the TCS provisions will not apply up to ₹7 lacs post July 1, 2023. However, clarification on applicability of TCS provisions on remittance through bank/ Any other mode of remittance for non-medical and non-educational transaction up to ₹7 lacs would be required.
Q. As an industry expert, what do you think is the goal the ministry of finance wants to achieve via these changes?
At the time of extending the TCS provisions to the remittance under LRS it was stated that “In order to widen and deepen the tax net, it is proposed to amend section 206C to levy TCS on overseas remittance and for sale of overseas tour package, as under.”
The objective of including ICC within the LRS limit seems to be multifold:
- To bring parity in debit card and ICC transactions.
- Some International credit card had limits of more than the LRS limit of $2,50,000 which resulted in busting of the LRS limits.
- Track the individuals who are remitting funds under LRS including credit card payments. The amounts remitted under LRS for F.Y 2022-23 was $24 billion and more than 50% of the same was used for foreign travel.
- Perhaps the unclaimed credit of TCS deducted of 5 percent was high in the last years and hence, TCS rate is increased to 20% effective from July 1.
- To conserve foreign exchange as LRS remittances has increased significantly in the last 5 years.
Q. What will be the impact of these changes on those who travel abroad frequently?
Now it is imperative for the individual who frequently travels abroad to keep a tab on their spending as now the spent-on ICC is also covered within the LRS limit of $2,50,000.
It is pertinent note that the FAQ dated May 18, 2023 issued by Ministry of Finance has clarified that if the employee has been deputed by Indian entity abroad and the expenses incurred overseas will be borne by the Indian entity then the same will not be accounted while computing the threshold limit of $250,000.
Further, if the employee incurs the expenses on ICC and the company reimburses the expenditure the employee may be subjected to TCS if the spent is more than ₹7,00,000.
This will create administrative hassle for the employee claiming refund of the TCS but the expenditure is borne by the company.